UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-18550
NTS MORTGAGE INCOME FUND
(Exact name of registrant as specified in its charter)
Delaware 61-1146077
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
10172 Linn Station Road
Louisville, Kentucky 40223
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code (502) 426-4800
Not Applicable
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
As of November 1, 1995, there were approximately 3,187,000 shares of common
stock outstanding.
<PAGE>
TABLE OF CONTENTS
Pages
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1995 and
December 31, 1994 3
Statements of Income
For the three and nine months ended
September 30, 1995 and 1994 4
Statement of Stockholders' Equity
For the nine months ended September 30, 1995 5
Statements of Cash Flows
For the nine months ended
September 30, 1995 and 1994 6
Notes To Financial Statements 7-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 3. Defaults upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NTS MORTGAGE INCOME FUND
BALANCE SHEETS
<CAPTION>
As of As of
September 30, 1995 December 31, 1994*
<S> <C> <C>
ASSETS
Mortgage loans receivable:
Earning loans $ 57,877,726 $ 46,123,406
Non-earning loans 5,625,092 6,098,846
------------ ------------
63,502,818 52,222,252
Less reserves for loan losses 1,638,855 1,638,855
------------ ------------
Net mortgage loans receivable 61,863,963 50,583,397
Cash and equivalents 592,145 308,155
Interest receivable 930,635 372,828
Other assets 178,219 --
------------ ------------
Total assets $ 63,564,962 $ 51,264,380
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
expenses $ 136,349 $ 154,615
Dividends payable 31,873 127,493
Note payable - affiliate (Note 5) 750,000 --
Notes payable 13,476,000 1,936,528
Deferred revenues 5,868 4,159
------------ ------------
Total liabilities 14,400,090 2,222,795
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value,
6,000,000 shares authorized;
3,187,333 shares issued and
outstanding $ 3,187 $ 3,187
Additional paid-in-capital 54,163,397 54,163,397
Distributions in excess of net
income (5,001,712) (5,124,999)
------------ ------------
Total stockholders' equity 49,164,872 49,041,585
------------ ------------
Total liabilities and
stockholders' equity $ 63,564,962 $ 51,264,380
============ ============
The accompanying notes are an integral part of these financial statements.
* Reference is made to the Fund's audited financial statements in the Form
10-K as filed with the Securities and Exchange Commission on March 30,
1995.
</TABLE>
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues:
Interest income on mortgage
loans receivable $ 731,037 $ 532,136 $ 2,105,742 $ 2,177,225
Fee income on mortgage loans
and other financial services 5,166 67,423 10,044 124,570
Gross receipts and supplemental
interest income -- 14,075 -- 126,964
Interest income on cash equivalents
and miscellaneous income 5,238 1,932 17,701 6,660
----------- ----------- ----------- -----------
741,441 615,566 2,133,487 2,435,419
----------- ----------- ----------- -----------
Expenses:
Advisory fee (Note 5) $ 132,670 $ 153,400 $ 396,472 $ 460,100
Interest expense 332,719 47,307 893,772 135,317
Professional and administrative 37,426 42,000 112,619 136,200
Other taxes and licenses 6,515 5,215 18,990 15,705
Amortization expense 13,000 8,736 39,000 28,464
Provision for loan losses -- -- -- 150,000
----------- ----------- ----------- -----------
522,330 256,658 1,460,853 925,786
----------- ----------- ----------- -----------
Income before income tax expense 219,111 358,908 672,634 1,509,633
Income tax expense (2,500) (5,000) (7,500) (25,000)
----------- ----------- ----------- -----------
Net income $ 216,611 $ 353,908 $ 665,134 $ 1,484,633
=========== =========== =========== ===========
Net income per share of common
stock $ .07 $ .11 $ .21 $ .47
=========== =========== =========== ===========
Weighted average number of shares 3,187,333 3,187,333 3,187,333 3,187,333
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
<CAPTION>
Additional Distributions
Paid-in- in Excess of
Common Stock Capital Net Income Total
Shares Amount
<S> <C> <C> <C> <C> <C>
Stockholders' equity
December 31, 1994 3,187,333 $ 3,187 $ 54,163,397 $(5,124,999) $ 49,041,585
Net income -- -- -- 665,134 665,134
Dividends declared -- -- -- (541,847) (541,847)
---------- -------- ------------ -----------
Stockholders' equity
September 30, 1995 3,187,333 $ 3,187 $ 54,163,397 $(5,001,712) $ 49,164,872
========== ======== ============ ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
<CAPTION>
1995 1994
<S> <C> <C>
CASH FLOWS FROM (USED FOR) OPERATING
ACTIVITIES
Net income $ 665,134 $ 1,484,633
Adjustments to reconcile net income
to net cash provided by operating
activities:
Accretion of discount on mortgage
loans receivable (88,850) --
Amortization expense 39,000 28,464
Provision for loan losses -- 150,000
Changes in assets and liabilities:
Interest receivable (557,807) (334,414)
Other assets (7,000) (6,441)
Accounts payable and accrued
expenses (18,266) (4,777)
Deferred commitment fees -- (99,180)
Deferred revenues 1,709 (633)
----------- ------------
Net cash provided by operating
activities 33,920 1,217,652
----------- ------------
CASH FLOWS FROM (USED FOR) INVESTING
ACTIVITIES
Principal collections on mortgage
loans receivable $ 5,972,911 $ 3,143,263
Investment in mortgage loans
receivable (17,164,627) (3,278,406)
------------ ------------
Net cash used for investing
activities (11,191,716) (135,143)
------------ ------------
CASH FLOWS FROM (USED FOR) FINANCING
ACTIVITIES
Proceeds from notes payable $ 14,068,000 $ 554,691
Payments on notes payable (2,528,528) (802,897)
Proceeds from note payable - affiliate 750,000 --
Dividends paid (637,467) (1,426,331)
Other assets (210,219) --
------------ ------------
Net cash provided by (used for)
financing activities 11,441,786 (1,674,537)
------------ ------------
Net increase (decrease) in cash
and equivalents $ 283,990 $ (592,028)
CASH AND EQUIVALENTS, beginning of
period 308,155 715,186
------------ ------------
CASH AND EQUIVALENTS, end of period $ 592,145 $ 123,158
============ ============
Cash paid during the period for:
Interest $ 801,858 $ 149,161
Income taxes $ 550 $ 36,082
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
NTS MORTGAGE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
The financial statements and schedules included herein should be read in
conjunction with the Fund's 1994 Annual Report on Form 10-K. In the opinion
of the Fund's Management, all adjustments (only consisting of normal
recurring accruals) necessary for a fair presentation have been made to the
accompanying financial statements for the nine months ended September 30,
1995 and 1994.
1. Income Taxes
The Fund has elected and is qualified to be treated as a REIT under
Internal Revenue Code Sections 856-860. In order to qualify, the Fund
is required to distribute at least 95% of its taxable income to
Stockholders and meet certain other requirements. The Fund intends to
continue to qualify as a REIT for Federal income tax purposes.
A reconciliation of net income for financial statement purposes versus
that for income tax reporting for the nine months ended September 30,
1995 is as follows:
Net income (GAAP) $ 665,134
Accretion of note discount (88,850)
Federal income tax expense 5,250
Letters of credit income 1,710
Supplemental interest income (1,717)
---------
Taxable income before dividends
paid deduction $ 581,527
=========
Dividends declared $ 541,847
=========
Distribution percentage 93%
=========
2. Reserves for Loan Losses
Reserves for loan losses are based on management's evaluation of the
borrower's ability to meet its obligation as well as current and future
economic conditions. Reserves are based on estimates and ultimate
losses may vary. These estimates are reviewed periodically and, as
adjustments become necessary, they are reported in earnings in the
period in which they become known. On a regular basis, management
reviews each mortgage loan in the Fund's portfolio including an
assessment of the recoverability of the individual mortgage loans. As
of September 30, 1995, the Fund has a loan loss reserve regarding the
$3,000,000 Phase-In Mortgage Loan to the Orlando Lake Forest Joint
Venture (with an outstanding balance of $434,811 as of September 30,
1995) amounting to $138,855 and a loan loss reserve regarding the
Temporary Mortgage Loan to the Orlando Lake Forest Joint Venture (with
an outstanding balance of $5,190,281 as of September 30, 1995)
amounting to $1,500,000.
<PAGE>
3. Mortgage Loans Receivable, net
The Fund's mortgage loan portfolio at September 30, 1995 consists of the
following temporary investments and mortgage loans:
Property Pledged Interest Maturity
Borrower as Collateral Rate Date
1) Earning Loans:
Mortgage Loans:
NTS/Virginia First mortgage on 17% of 07/01/97
Development approximately 2,439 acres Gross
Company of residential land and Receipts
improvements thereon (a)(b)
located in Fredericksburg,
Virginia, known as Fawn
Lake
NTS/Lake Forest First mortgage on 17% of 07/01/97
II Residential approximately 568 acres Gross
Corporation of residential land in Receipts
Louisville, Kentucky, known (a)(b)
as Lake Forest
Orlando Lake First mortgage on 17% of 01/31/98
Forest Joint approximately 431 acres Gross
Venture of residential land in Receipts
Orlando, Florida known as (c)
Orlando Lake Forest
(a) Effective July 1, 1994, these Mortgage Loans are paying interest at the
greater of 17% of Gross Receipts or 4.42% of the average outstanding loan
balance.
(b) These Mortgage Loans included a provision for Gross Receipts Interest
through June 30, 1994.
(c) This Mortgage Loan pays interest at the greater of 17% of Gross Receipts
or 6.46% of the average outstanding loan balance.
<PAGE>
<TABLE>
3. Mortgage Loans Receivable, net - Continued
<CAPTION>
Total Balance Interest
Senior Face Outstanding Commitment Receivable
Liens At Amount At At Fees At
09/30/95 09/30/95 09/30/95 Received 09/30/95
<S> <C> <C> <C> <C> <C>
1) Earning Loans:
Mortgage Loans:
NTS/Virginia $531,329 $28,000,000 $26,768,232 $ 200,000 $ 445,473
Development (d) (f)
Company
NTS/Lake Forest 382,554 28,000,000 26,119,336 250,000 340,225
II Residential (e) (g)
Corporation
Orlando Lake -- 13,000,000 4,990,158 -- 144,937
Forest Joint (h) (i)
Venture
---------- ---------- ---------- ----------
Total Earning Loans $69,000,000 $57,877,726 $ 450,000 $ 930,635
========== ========== ========== ==========
(d) Senior lien applies to approximately 45 acres securing the first
mortgage which are subordinated to an unaffiliated lender.
(e) Senior liens apply to approximately 180 acres securing the first
mortgage which are subordinated to unaffiliated lenders.
(f) NTS Guaranty Corporation guarantees up to $2 million of outstanding debt
exceeding $18 million.
(g) NTS Guaranty Corporation guarantees up to $2,416,500 of outstanding debt
exceeding $22 million.
(h) An Affiliate of the Fund's Sponsor participates with the Fund regarding
this Mortgage Loan. As of September 30, 1995, the Fund's ownership
percentage was approximately 57%.
(i) The carrying amount of this Mortgage Loan is net of an unaccreted
discount of approximately $1,312,000.
</TABLE>
<PAGE>
3. Mortgage Loans Receivable, net - Continued
Property Pledged Interest Maturity
Borrower as Collateral Rate Date
2) Non-Earning Loans:
Temporary
Mortgage Loan:
Orlando Lake Pledge by both general Prime + 2% Demand
Forest Joint partners of their (k)
Venture partnership interests in
Orlando Lake Forest Joint
Venture located in Orlando,
Florida; a pledge of 390
shares of the Class A common
stock in NTS/Virginia
Development Company; NTS
Guaranty Corporation
guarantees the loan
Mortgage Loan:
Orlando Lake First mortgage on Prime + 2% Demand
Forest Joint approximately 4 acres of (k)
Venture residential land located
in Orlando, Florida known
as Orlando Lake Forest
Joint Venture
(k) The Orlando Lake Forest Joint Venture has entered into a forbearance
agreement with the Fund whereby, effective April 1, 1995, no interest
will be due on these loans through January 31, 1998.
<PAGE>
<TABLE>
3. Mortgage Loans Receivable, net - Continued
<CAPTION>
Total Balance Interest
Senior Face Outstanding Commitment Receivable
Liens At Amount At At Fees At
09/30/95 09/30/95 09/30/95 Received 09/30/95
<S> <C> <C> <C> <C> <C>
2) Non-Earning Loans:
Temporary
Mortgage Loan:
Orlando Lake $11,569,260 $ 7,818,000 $ 5,190,281 $ 150,000 $ --
Forest Joint (l) (m) (n) (p)
Venture
Mortgage Loan:
Orlando Lake -- 3,000,000 434,811 30,000 --
Forest Joint (o) (p)
Venture
---------- ---------- ---------- ----------
Total Non-Earning
Loans $10,818,000 $ 5,625,092 $ 180,000 $ --
========== ========== ========== ==========
(l) Total senior liens include a $434,811 mortgage loan with the Fund and a
57% interest in a senior lien totalling $11,134,449 with the Fund.
(m) NTS/Virginia Development Company (Fawn Lake) and NTS/Lake Forest II
Residential Corporation (Lake Forest) participate with the Fund
regarding this Temporary Mortgage Loan. The percentage ownership as of
September 30, 1995 is 14.44% and 15.64%, respectively.
(n) The Fund has established a $1,500,000 loan loss reserve as of September
30, 1995.
(o) The Fund has established a $138,855 loan loss reserve as of September
30, 1995.
(p) The Fund has discontinued accruing interest from the Temporary Mortgage
Loan and the Phase-In Mortgage Loan to the Orlando Lake Forest Joint
Venture until the interest payment is received. Approximately
$1,827,000 of interest remains due to the Fund on these loans but is
not accrued in the Fund's financial statements.
</TABLE>
<PAGE>
4. Notes Payable
Notes payable consist of the following:
September 30, December 31,
1995 1994
Note payable to a bank in the amount
of $13,800,000 bearing interest at
the Prime Rate plus 1%, payable
monthly, due December 27, 1997,
secured by a collateral assignment
of the Fund's mortgages on Lake
Forest and Fawn Lake, guaranteed
by Mr. J. D. Nichols, Chairman of
the Board of the Fund's Sponsor $13,208,000 $ --
Note payable to a bank in the amount
of $268,000, bearing interest at the
Prime Rate plus 3/4%, payable monthly,
due December 28, 1995, guaranteed by
Mr. J. D. Nichols 268,000 --
Note payable to a bank in the amount
of $2,800,000, bearing interest at
the Prime Rate plus 1%, payable
monthly, secured by a collateral
assignment of the Fund's mortgage
on Lake Forest, paid in full on
January 10, 1995 -- 1,936,522
---------- ----------
$13,476,000 $ 1,936,528
========== ==========
The Prime Rate was 8.75% and 8.50% at September 30, 1995 and December
31, 1994, respectively.
5. Related Party Transactions
As of September 30, 1995, the Sponsor (NTS Corporation) or an Affiliate
owned approximately 28,165 Shares of the Fund.
Pursuant to the Advisory Agreement, the Fund will pay the Advisor (NTS
Advisory Corporation) a Management Expense Allowance (Advisory Fee)
relating to services performed for the Fund in an amount equal to 1% of
the Fund's Net Assets, per annum, which may be increased annually by an
amount corresponding to the percentage increase in the Consumer Price
Index. Effective July 1, 1994, the Fund's Mortgage Loans to Fawn Lake
and Lake Forest were converted to cash flow mortgage loans. As part of
the consideration for this restructuring, the Fund's Board of Directors
required, among other things, that beginning in 1995, NTS Advisory
Corporation pay $100,000 annually towards the expenses of the Fund
until the maturity of the Mortgage Loans. As such, the Advisory Fee
has been reduced $75,000 for the nine months ended September 30, 1995.
The Advisory Fee for the nine months ended September 30, 1995 and 1994
was $396,472 and $460,100, respectively.
During the third quarter of 1995, the Fund borrowed $750,000 from an
Affiliate of the Fund's Sponsor. The advance is in the form of a non-
interest bearing note payable and matures April 15, 1996. The advance
was made to meet the development plans of the projects to which the
Fund has outstanding loans.
<PAGE>
5. Related Party Transactions - Continued
On February 17, 1995, the Fund purchased from an unaffiliated bank an
interest in a $13 million first mortgage (with an outstanding balance
of $9,664,465 as of February 17, 1995) to the Orlando Lake Forest Joint
Venture. An Affiliate of the Sponsor owns the remaining interest via
a participation agreement. The initial ownership percentages were 50%
to the Fund and 50% to the Affiliate, however, the percentage ownership
will fluctuate as additional principal is advanced to the Joint Venture
by the Fund. Ownership percentages will be determined in accordance
with the ratio of each participant's share of the outstanding loan
balance to the total outstanding loan balance. As of September 30,
1995, the outstanding balance on the first mortgage was $11,134,449,
and the Fund's ownership percentage was approximately 57%.
In 1993, Fawn Lake and Lake Forest entered into a participation
agreement with the Fund whereby they were each assigned an interest in
the Fund's Temporary Mortgage Loan with the Orlando Lake Forest Joint
Venture. The percentage ownership as of September 30, 1995 is 14.44%
to Fawn Lake and 15.64% to Lake Forest.
6. Guaranties to the Fund
NTS Guaranty Corporation (the Guarantor), an Affiliate of the Sponsor,
has agreed to provide the following guaranties to the Fund:
Junior Mortgage Loan Guaranty
The Guarantor guarantees the payment to the Fund, on a timely basis, of
the Principal (as defined in the Prospectus) of all Junior Mortgage
Loans and Temporary Mortgage Loans made by the Fund to Affiliated
Borrowers. The Guarantor's obligation is limited to the Principal
balance outstanding on the Junior Mortgage Loan or Temporary Mortgage
Loan and does not include the Interest Reserve, as defined in the
Prospectus. This guaranty will not apply to Junior Mortgage Loans or
Temporary Loans made to Non-Affiliated Borrowers.
On October 19, 1992, the Fund notified the Orlando Lake Forest Joint
Venture (the "Joint Venture") that the Joint Venture is in payment
default regarding the Fund's Temporary Mortgage Loan to the Joint
Venture. This default gives the Fund the right to pursue the Guarantor
for its guaranty. The Fund's Board of Directors continues to evaluate
the collectability of the guaranty. The Board is also concerned about
the possible detrimental effects that the collection proceedings may
have on the Fund's other loans to other Affiliated Borrowers. The
Board has concluded that it is in the best interest of the Fund and its
Stockholders to pursue a work-out plan to both preserve the assets of
the Fund and support the viability of the projects to which it has
outstanding loans.
Purchase Price Guaranty
The Guarantor has guaranteed that investors of the Fund will receive,
over the life of the Fund, aggregate distributions from the Fund (from
all sources) in an amount at least equal to their Original Capital
Contributions, as defined in the Prospectus.
The liability of the Guarantor under the above guaranties is expressly
limited to its assets and its ability to draw upon a $10 million demand
note receivable from Mr. J.D. Nichols, Chairman of the Board of
Directors of the Sponsor. There can be no assurance that Mr. Nichols
will, if called upon, be able to honor his obligation to the Guarantor.
In addition, Mr. Nichols' ability to make any payments to the Guarantor
pursuant to the $10 million demand note may be affected by additional
liabilities and obligations that he has or may incur. There are no
<PAGE>
6. Guaranties to the Fund - Continued
limitations on Mr. Nichols' ability to incur liabilities or obligations
in the future. The total amounts guaranteed by the Guarantor are in
excess of its net worth, and there is no assurance that the Guarantor
will be able to satisfy its obligation under these guaranties. The
Guarantor may in the future provide guaranties for other Affiliates of
the Fund.
7. Commitments and Contingencies
The Fund has commitments to extend credit made in the normal course of
business that are not reflected in the financial statements. At
September 30, 1995, the Fund had outstanding funding commitments under
standby letters of credit or surety bonds aggregating $985,664:
Orlando Lake Forest Joint Venture $517,813; NTS/Virginia Development
Co. $467,851. These outstanding funding commitments are part of the
maximum funding amount of the mortgage loans. Committed undisbursed
loans were approximately $6 million at September 30, 1995.
In August 1992, Jeno Paulucci & Silver Lakes I, Inc., individually and
d/b/a PR Partners (PR Partners) filed a complaint ("Original
Complaint") against J. D. Nichols, NTS Corporation, NTS/Florida
Residential Properties, Inc., Orlando Lake Forest, Inc. and Banc One
Mortgage Corporation. The Original Complaint alleges, inter alia,
mismanagement of the Orlando Lake Forest project by Orlando Lake
Forest, Inc. as well as conspiracy among the defendants against PR
Partners and its principals. The Original Complaint requested
unspecified damages and declaratory and injunctive relief against the
defendants. The Fund was not named as a defendant in the Original
Complaint. In July 1994, the plaintiffs filed an amended complaint
("Amended Complaint") adding NTS/Residential Properties, Inc. -
Florida, Lake Forest Realty, Inc. and the Fund as defendants, and
amended this Complaint again in July 1995, in response to rulings by
the trial judge requiring clarification of certain claims asserted by
the plaintiffs. The case is in the early discovery phase, certain of
the defendants have answered the Complaint and asserted counterclaims
against the plaintiffs. Lake Forest Realty, Inc., the Fund and Banc
One Mortgage Corporation have again moved to dismiss the Complaint, as
amended. Therefore, an outcome to this litigation cannot be predicted
at present. Mr. J. D. Nichols and the principals of the defendants
have indicated that the suit will be vigorously defended, and that
counterclaims will be vigorously prosecuted against the plaintiffs.
Management believes that this lawsuit will have no material effect on
the Fund's operations or financial condition.
<PAGE>
<TABLE>
8. Supplemental Financial Information
NTS Guaranty Corporation has provided material guaranties to the Fund. The
following presents condensed financial information for NTS Guaranty
Corporation.
<CAPTION>
September 30, December 31,
1995 1994
<S> <C> <C>
Cash $ 100 $ 100
============ ============
Common stock and paid-in-
capital $ 10,000,100 $ 10,000,100
Note receivable from
stockholder (10,000,000) (10,000,000)
------------ ------------
Equity $ 100 $ 100
============ ============
The Fund has invested in various temporary investments and mortgage loans
(see Note 3). The following presents condensed financial information with
respect to borrowers whose loan balance as of September 30, 1995 represents
a substantial concentration of the Fund's assets.
NTS/Lake Forest II Residential Corporation
<CAPTION>
September 30, December 31,
Balance Sheets 1995 1994
<S> <C> <C>
Notes Receivable $ 1,932,957 $ 2,054,725
Inventory 26,259,371 26,445,755
Other, net 5,141,848 4,287,882
------------ ------------
Total Assets $ 33,334,176 $ 32,788,362
============ ============
Notes Payable $ 29,805,920 $ 28,537,902
Other Liabilities, net 2,560,132 2,899,688
Equity 968,124 1,350,772
------------ ------------
Total Liabilities and Equity $ 33,334,176 $ 32,788,362
============ ============
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Statements of Operations 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Lot Sales $ 966,039 $ 689,907 $ 3,201,208 $ 2,114,064
Cost of Sales (702,632) (465,130) (2,338,150) (1,325,052)
Marketing and Development Fee -- (70,089) -- (366,267)
Provision for Loan Losses -- -- (465,932) --
Other Income (Expense), net (170,919) (135,142) (779,743) (480,256)
------------ ------------ ------------ ------------
Net Income (Loss) $ 92,488 $ 19,546 $ (382,617) $ (57,511)
============ ============ ============ ============
NTS/Virginia Development Company
<CAPTION>
September 30, December 31,
Balance Sheets 1995 1994
<S> <C> <C>
Notes Receivable $ 5,267,218 $ 5,437,417
Inventory 29,441,994 25,467,805
Other, net 1,428,635 1,647,151
------------ ------------
Total Assets $ 36,137,847 $ 32,552,373
============ ============
Notes Payable $ 32,459,684 $ 28,450,059
Other Liabilities, net 2,159,635 2,464,224
Equity 1,518,528 1,638,090
------------ ------------
Total Liabilities and Equity $ 36,137,847 $ 32,552,373
============ ============
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Statements of Operations 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Lot Sales $ 1,205,841 $ 814,457 $ 2,344,899 $ 2,547,488
Cost of Sales (741,805) (496,088) (1,462,680) (1,496,335)
Marketing and Development Fee -- (118,239) -- (508,634)
Provision for Loan Losses -- -- (406,739) --
Other Income (Expense), net (269,843) (74,569) (595,042) (367,694)
------------ ------------ ------------ ------------
Net Income (Loss) $ 194,193 $ 125,561 $ (119,562) $ 174,825
============ ============ ============ ============
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The NTS Mortgage Income Fund (the "Fund") was formed September 26, 1988 to
operate as a real estate investment trust (REIT) under the Internal Revenue
Code of 1986, as amended. The Fund commenced an offering to the public on
March 31, 1989 and was authorized to sell up to 2,500,000 shares of common
stock at $20.00 per share (subject to an increase to 5,000,000 shares at the
option of the Fund). Approximately 3,187,000 shares were sold representing
approximately $64 million in sales and approximately $9.5 million in selling
expenses and other offering costs. The net offering proceeds remaining,
after payment of brokerage commissions, organizational expenses and other
costs, have been used to make Mortgage Loans and Temporary Investments and
such other investments as permitted by the Fund's Prospectus. Capitalized
terms shall have the meaning ascribed in the "Glossary" on pages 75 to 81
of the Fund's Prospectus, which is filed herewith and incorporated by
reference.
Liquidity and Capital Resources
The Fund's objectives are to make investments which will: (i) preserve and
protect the Fund's capital, (ii) provide for monthly distributions to
Stockholders, and (iii) increase the value of the Fund's net assets and its
shares of common stock through receipt of Incentive Interest or Gross
Receipts Interest.
The Fund's primary investment strategy is to make investments in Mortgage
Loans. As of September 30, 1995, the Fund had commitments outstanding for
Mortgage Loans aggregating $64,600,000 of which approximately $58,300,000
had been funded. The balance of these commitments will be drawn over a
period of years in a series of advances as the borrowers develop the
projects. Also, the Fund has invested in Temporary Investments totalling
approximately $5,000,000 as of September 30, 1995. Reference is made to
Note 3 of the Notes to Financial Statements for further information
regarding the Fund's investments as of September 30, 1995.
The Orlando Lake Forest Project (the "Orlando Project") is a single-family
residential community owned by the Orlando Lake Forest Joint Venture, an
Affiliated Borrower. Until August 30, 1995, the partners of the Joint
Venture were Orlando Lake Forest, Inc., an affiliate of the Fund's Advisor,
and PR Partners, an unaffiliated third party. On August 30, 1995, the
interests of PR Partners in the Joint Venture were acquired by NTS/Orlando
Development Company, an affiliate of the Fund's Advisor, due to the failure
of PR Partners to make required capital contributions to the Joint Venture.
The Orlando Project is encumbered by a loan in the amount of $13,000,000
(with an outstanding balance of $11,134,449 as of September 30, 1995)
from the Fund and an Affiliate of the Fund's Sponsor. The loan is
secured by a second mortgage on Section II of the Project and a first
mortgage on the balance of the Project, approximately 431 acres of
residential land and improvements thereon located in Orlando, Florida.
On February 17, 1995, an agreement was reached with the bank which had
previously held a partial interest in the first mortgage on the majority
of the Orlando Project. As a result of negotiations between the Fund
and the unaffiliated bank, the bank sold its interest in the loan to the
Fund at a substantial discount. The Fund and the Affiliate of the
Fund's Sponsor, which holds the remaining interest in the first
mortgage, entered into a participation agreement (the Master Loan
Participation Agreement) whereby the Fund and the Affiliate will own a
proportionate share of the $13 million first mortgage. The initial
ownership percentages were 50% to the Fund and 50% to the Affiliate,
however, the percentage ownership will fluctuate as additional principal
<PAGE>
Liquidity and Capital Resources - Continued
is advanced to the Orlando Project by the Fund and as principal payments
are received. Ownership percentages will be determined in accordance
with the ratio of each participant's share of the outstanding loan
balance to the total outstanding loan balance. As of September 30,
1995, the Fund's ownership percentage was approximately 57%. The loan
was converted to a cash flow mortgage loan which bears interest at an
annualized rate equal to the greater of 17% of Gross Receipts or 6.46%
of the average outstanding loan balance and matures January 31, 1998.
The Orlando Project is encumbered by the Phase-In Mortgage Loan from the
Fund in the amount of $3,000,000 (with an outstanding balance of
$434,811 as of September 30, 1995) to the Orlando Lake Forest Joint
Venture for the development of Section II of the Project (the "Phase-In
Mortgage Loan"). The loan is secured by a first mortgage on
approximately 4 acres of residential land located in Orlando, Florida.
The Phase-In Mortgage Loan is on a demand basis.
The Orlando Project is encumbered by a Temporary Mortgage Loan in the
amount of $7,818,000 (with an overall outstanding balance by the Orlando
Project of $7,423,202 as of September 30, 1995) to partially fund the
Orlando Lake Forest Project. The loan is secured by the partnership
interests of both general partners in the Orlando Lake Forest Joint
Venture and 390 shares of the Class A common stock of NTS/Virginia
Development Company (Fawn Lake). The Temporary Mortgage Loan is on a
demand basis. The Principal balance outstanding of the Temporary
Mortgage Loan is guaranteed by NTS Guaranty Corporation pursuant to the
Fund's Junior Mortgage Loan Guaranty. In October 1993, Fawn Lake and
NTS/Lake Forest II Residential Corporation (Lake Forest) entered into a
participation agreement with the Fund (the Temporary Mortgage Loan
Participation Agreement) whereby they were each assigned an interest in
the Fund's Temporary Mortgage Loan with the Orlando Lake Forest Joint
Venture in consideration for reducing the amount of Supplemental
Interest credit then due to them by the Fund. The percentage ownership
as of September 30, 1995 to Fawn Lake and Lake Forest was 14.44% and
15.64%, respectively. The Fund's share of the loan balance was
$5,190,281 at September 30, 1995.
On October 19, 1992, the Fund notified the Orlando Lake Forest Joint
Venture (the "Joint Venture") that the Joint Venture is in default
regarding the Fund's Temporary Mortgage Loan and the Fund's $3,000,000
Phase-In Mortgage Loan (the "Promissory Notes") to the Joint Venture.
The defaults occurred when the Joint Venture failed to pay the Fund the
interest that was due on the Promissory Notes as of October 1, 1992.
These defaults give the Fund the right to accelerate the indebtedness
and foreclose the lien of the mortgage which secures the $3,000,000
Phase-In Mortgage Loan and foreclose its security interest in the
partnership interests pledged against the Temporary Mortgage Loan.
Also, the Fund has the right to pursue the NTS Guaranty Corporation for
its guaranty of the Principal balance outstanding on the Temporary
Mortgage Loan. The ability of the Guarantor to honor its guaranty on
the Temporary Mortgage Loan is expressly limited to its assets and its
ability to draw upon a $10 million demand note receivable from Mr. J. D.
Nichols, Chairman of the Board of Directors of the Fund's Sponsor. Mr.
Nichols has contingent liabilities which exist in connection with debt
on properties held by himself or his affiliates. There can be no
assurance that Mr. Nichols will, if called upon, be able to honor his
obligation to the Guarantor. The Fund's Board of Directors continues to
evaluate the collectability of the guaranty. The Board is also
concerned about the possible detrimental effects that the collection
proceedings may have on the Fund's other loans to other Affiliated
<PAGE>
Liquidity and Capital Resources - Continued
Borrowers. As a result, the Board has concluded that it is in the best
interest of the Fund and its Stockholders to pursue a work-out plan to
both preserve the assets of the Fund and support the viability of the
projects to which it has outstanding loans. On March 24, 1993, the
first part of this plan was implemented whereby the Fund received
additional collateral in the form of a pledge of 390 shares of the Class
A common stock in NTS/Virginia Development Company by J. D. Nichols to
support the collectability of the Temporary Mortgage Loan to the Orlando
Lake Forest Joint Venture.
As discussed above, the Fund and an Affiliate of the Fund's Sponsor now
are the first mortgage holders on the Orlando Project. As with the
other Residential Land Development Loans, the Fund will be providing the
funds needed by the Orlando Project to allow it to continue its
development plan. Principal and interest payments will be allocated
proportionately between the Fund and the Affiliate based upon their
respective ownership percentage.
In June of 1995, the Fund's Board of Directors approved a change to the
terms of the Master Loan Participation Agreement and the Temporary
Mortgage Loan Participation Agreement. Effective April 1, 1995 the
Affiliate of the Fund's Sponsor agreed that the Fund may retain all
payments of principal which the Affiliate would be entitled to receive
on the $13 million Mortgage Loan. The Fund is applying such sums as
payment by the Orlando Lake Forest Joint Venture of the principal
balance outstanding on the Temporary Mortgage Loan. This will continue
until such time as the Fund's share of the outstanding principal of the
Temporary Mortgage Loan has been repaid in full.
The completion and marketing of the Orlando Project as planned should
allow the Orlando Lake Forest Joint Venture to repay both the first
mortgage and the outstanding principal balance of the Fund's Temporary
Mortgage Loan.
The Fund has established a $1,500,000 loan loss reserve regarding the
Temporary Mortgage Loan. The amount of the reserve is based on the
requirements by GAAP that the mortgage loans be carried at the lower of
the carrying value of the asset or net realizable value. Given the
likelihood that it will be some time in the future before the Fund can
collect the principal balance outstanding, GAAP requires that this
stream of payments be discounted to determine the net realizable value
at the balance sheet date even though this loan is guaranteed by NTS
Guaranty Corporation. This calculation does not lessen the Fund's
ability or expectation that the entire principal balance outstanding
will be collected in full.
Also, the Fund has established a $138,855 loan loss reserve regarding
the $3,000,000 Phase-In Mortgage Loan to the Orlando Lake Forest Joint
Venture. The amount of the reserve is based on the Borrower's ability
to meet its obligation as well as current and future economic
conditions. This reserve is based on estimates and ultimate losses may
vary. These estimates are reviewed periodically and, as adjustments
become necessary, they are reported in earnings in the period in which
they become known. Generally Accepted Accounting Principles (GAAP)
dictate that the Fund's mortgage loans be carried at the lower of the
carrying value of the asset or net realizable value. The Fund has
reduced the amount due on the Phase-In Mortgage Loan by $241,145 as an
amount deemed uncollectible. The loan is non-recourse, thus, once the
remaining lots in Section II of the Orlando Project have been sold, the
<PAGE>
Liquidity and Capital Resources - Continued
Fund has no further course of action to pursue collection. Given the
uncertainty as to the length of time required for the Fund to collect
the principal due on the $3,000,000 Phase-In Mortgage Loan, it is
possible that an additional reserve will be needed.
The Fund discontinued the recognition of interest income from the
$3,000,000 Phase-In Mortgage Loan and the Temporary Mortgage Loan to the
Orlando Lake Forest Joint Venture beginning July 1, 1992, until the
principal and interest have been received. Approximately $1,827,000 of
interest remains due the Fund on these loans as of April 1, 1995. The
Fund has entered into a forbearance agreement with the Orlando Lake
Forest Joint Venture whereby, effective April 1, 1995, no interest will
be due on these loans through January 31, 1998. The Fund will
reevaluate the status of the Orlando Project at that time to determine
what, if any, additional courses of action to pursue, and whether to
extend the forbearance of interest.
In August 1992, Jeno Paulucci & Silver Lakes I, Inc., individually and
d/b/a PR Partners (PR Partners) filed a complaint ("Original Complaint")
against J. D. Nichols, NTS Corporation, NTS/Florida Residential
Properties, Inc., Orlando Lake Forest, Inc. and Banc One Mortgage
Corporation. The Original Complaint alleges, inter alia, mismanagement
of the Orlando Lake Forest project by Orlando Lake Forest, Inc. as well
as conspiracy among the defendants against PR Partners and its
principals. The Original Complaint requested unspecified damages and
declaratory and injunctive relief against the defendants. The Fund was
not named as a defendant in the Original Complaint. In July 1994, the
plaintiffs filed an amended complaint ("Amended Complaint") adding
NTS/Residential Properties, Inc. - Florida, Lake Forest Realty, Inc. and
the Fund as defendants, and amended this Complaint again in July 1995,
in response to rulings by the trial judge requiring clarification of
certain claims asserted by the plaintiffs. The case is in the early
discovery phase, certain of the defendants have answered the Complaint
and asserted counterclaims against the plaintiffs. Lake Forest Realty,
Inc., the Fund and Banc One Mortgage Corporation have again moved to
dismiss the Complaint, as amended. Therefore, an outcome to this
litigation cannot be predicted at present. Mr. J. D. Nichols and the
principals of the defendants have indicated that the suit will be
vigorously defended, and that counterclaims will be vigorously
prosecuted against the plaintiffs. Management believes that this
lawsuit will have no material effect on the Fund's operations or
financial condition.
The Fawn Lake project is a single-family residential community owned by
NTS/Virginia Development Company, an Affiliated Borrower. Fawn Lake is
encumbered by the following notes:
A note payable in the amount of $540,000 (with an outstanding balance of
$531,329 as of September 30, 1995) from an unaffiliated lender which is
secured by a first mortgage on 29 residential lots (approximately 45
acres of residential land and improvements thereon). The purpose of the
loan is to provide construction financing to develop approximately 44
lots of the Fawn Lake project (15 of which have been sold and released
from the mortgage). The Fund's Board of Directors agreed to subordinate
the Fund's Mortgage Loan regarding the 58 lots until the unaffiliated
lender note is paid in full. The note bears interest at the Prime Rate
plus 1%, payable monthly, and matures September 15, 1996.
A Mortgage Loan from the Fund in the amount of $28,000,000 (with an
outstanding balance of $26,768,232 as of September 30, 1995) to fund the
development of the Fawn Lake project, a specified investment. The loan
<PAGE>
Liquidity and Capital Resources - Continued
is secured by a first mortgage on approximately 2,439 acres of
residential land and improvements thereon located in Fredericksburg,
Virginia. (The Fund has subordinated its first mortgage on
approximately 45 acres regarding the loan discussed above.) The Fund's
Mortgage Loan bears interest at an annualized rate equal to the greater
of 17% of Gross Receipts or 4.42% of the average outstanding loan
balance and matures July 1, 1997.
The Lake Forest project is a single-family residential community owned by
NTS/Lake Forest II Residential Corporation, an Affiliated Borrower. Lake
Forest is encumbered by the following notes:
A note payable with an unaffiliated lender in the amount of $875,000
(with an outstanding balance of $274,945 as of September 30, 1995) which
is secured by a first mortgage on 13 residential lots (approximately 4
acres of residential land and improvements thereon). The purpose of the
loan is to provide construction financing to develop 25 lots in the Lake
Forest project (12 of which have been sold and released from the
mortgage). The Fund has subordinated its Mortgage Loan regarding the 25
lots until the unaffiliated lender note is paid in full. The note bears
interest at the Prime Rate plus 1%, payable monthly, and matures
November 24, 1995.
A note payable with an unaffiliated bank in the amount of $4,465,000
(with an outstanding balance of $107,609 as of September 30, 1995) which
is secured by a first mortgage lien on the Lake Forest Country Club golf
course (approximately 176 acres of residential land and improvements
thereon). The purpose of the loan is to provide construction financing
to construct a clubhouse building for the Country Club. The Fund has
subordinated its Mortgage Loan regarding the 176 acres until the
unaffiliated bank note is paid in full. The note bears interest at the
Prime Rate plus 1%, payable monthly, and matures July 31, 1999.
A Mortgage Loan from the Fund in the amount of $28,000,000 (with an
outstanding balance of $26,119,336 as of September 30, 1995) to fund the
development of the Lake Forest project, a specified investment. The
loan is secured by a first mortgage on approximately 568 acres of
residential land and improvements thereon located in Louisville,
Kentucky of which approximately 180 acres have been subordinated
regarding the loans discussed above. The Fund's Mortgage Loan bears
interest at an annualized rate equal to the greater of 17% of Gross
Receipts or 4.42% of the average outstanding loan balance and matures
July 1, 1997.
During 1994, the Fund's Board of Directors conducted an extended review of
the operations of the residential development borrowers. The Board
continued with its work-out plan regarding the Temporary Mortgage Loan to
the Orlando Lake Forest Joint Venture including implementing the steps
necessary to allow the Fund to acquire an interest in the first mortgage
loan secured by the Orlando Project. The Board also agreed that it was
necessary to revise the structure of the Fund's Mortgage Loans to Fawn Lake
and Lake Forest (the "Affiliated Borrowers") in order to protect the capital
of the Fund. After reviewing possible alternatives, it was determined that
it was necessary to change the structure of the loans to cash flow mortgage
loans which would relate the debt service to sales volumes, thereby allowing
the Affiliated Borrowers to develop the elements essential for successful
completion of the projects. It was judged by the Fund's Board of Directors
to be the approach most likely to effectively work out the current situation
and protect the Fund's capital. At the same time, the Board required that,
among other things, 1) the owners of the Affiliated Borrowers receive no
<PAGE>
Liquidity and Capital Resources - Continued
distributions from the projects until their loan is fully repaid, 2) NTS
Advisory Corporation will pay $100,000 annually towards the expenses of the
Fund beginning in 1995 until the maturity of the loans, and 3) the
Affiliated Borrowers will be required to pay to the Fund 100% of the Gross
Receipts from the sale of the underlying real estate (residential lots)
which secures the mortgage after paying closing costs. Effective July 1,
1994, the Affiliated Borrowers began paying interest at an annualized rate
equal to the greater of 17% of Gross Receipts or 4.42% of the average
outstanding loan balance. The Fund will no longer receive Regular Interest,
Gross Receipts Interest or other fees previously charged. Interest will be
due and payable monthly as lots are sold. Any shortfall to meet the minimum
rate of 4.42% will be due and payable December 31 of the calendar year. In
addition, the Fund's Board of Directors approved an increase in the loan
commitment amount to Lake Forest from $25,000,000 to $28,000,000 and
approved an increase in the loan commitment amount to Fawn Lake from
$20,000,000 to $28,000,000. The purpose of the increases was to enable the
projects to refinance certain obligations superior in priority to the Fund's
Mortgage Loans as well as to enable the projects to pay ongoing development
costs.
On July 21, 1995, the Fund's Temporary Mortgage Loan to the NTS/Mall Limited
Partnership was paid in full.
On January 24, 1992, the Fund entered into a loan agreement with an
unaffiliated bank providing for a credit facility of up to $2.8 million
secured by a collateral assignment of the Fund's mortgage on Lake Forest.
The purpose of the loan, as described in the Fund's Prospectus, was to
increase the Fund's investment portfolio and provide additional operating
capital for the Fund. On August 3, 1993, the credit limit was raised to $4
million and the maturity date was extended to August 3, 1997. The loan was
paid in full on January 10, 1995.
On January 10, 1995, the Fund entered into a loan agreement with an
unaffiliated bank providing for a credit facility of up to $13.8 million
secured by a collateral assignment of the Fund's mortgages on Lake Forest
and Fawn Lake. The purpose of the loan is to refinance the Fund's existing
credit facility, increase the Fund's investment portfolio and provide
additional operating capital for the Fund. The loan bears interest at the
Prime Rate plus 1%, payable monthly and matures December 27, 1997. The Fund
makes principal payments on the loan equal to $12,000 per lot from lot sales
at Lake Forest and $1,000 per lot from lot sales at Fawn Lake. The loan is
guaranteed by Mr. J. D. Nichols, Chairman of the Board of the Fund's
Sponsor. The loan balance was $13,208,000 as of September 30, 1995.
On September 29, 1995, the Fund entered into a loan agreement with an
unaffiliated bank for $268,000 secured by the guarantee of Mr. J. D.
Nichols. The loan bears interest at the Prime Rate plus 3/4%, payable
monthly and matures December 28, 1995. The purpose of the loan is to
provide interim funding to complete the construction of the Fawn Lake
Country Club golf course six months earlier than previously scheduled. The
Fund is in negotiations with the unaffiliated bank for a $2,000,000 loan for
this purpose. It is anticipated this loan will mature in the fourth quarter
of 1996.
In the third quarter of 1995, the Fund borrowed $750,000 from an Affiliate
of the Fund's Sponsor. The advance is in the form of a non-interest bearing
note payable and matures April 15, 1996. The advance was made to meet the
development plans of the projects to which the Fund has outstanding loans.
<PAGE>
Liquidity and Capital Resources - Continued
The Fund intends to maintain a working capital reserve equal to 1% of the
gross proceeds received. The Fund may alter the percentage of such reserves
if deemed necessary. As of September 30, 1995, the Fund had cash and
equivalents of approximately $600,000.
The primary source of future liquidity is expected to be from the interest
earned on the Mortgage Loans and on the Temporary Investments. The ability
of the Fund to receive interest on the Mortgage Loans depends primarily on
the level of residential lot closings achieved by the properties which
collateralize the loans. The interest received will be used to make cash
distributions to Stockholders and to pay operating expenses. In addition,
the Fund is continuing to focus on cash management and is pursuing financing
sources to provide sufficient resources to fund the needs of the projects
to which it has outstanding loans.
Distributions will equal at least 95% of taxable income so that the Fund
will continue to qualify as a real estate investment trust. For the next
twelve months, it is anticipated that returns on Stockholders' original
capital contributions will approximate 1% per annum. The Fund's cash and
cash equivalents are expected to be sufficient to meet its anticipated needs
for liquidity and capital resources.
Results of Operations
Net income using generally accepted accounting principles (GAAP) was
$216,611 and $353,908 and using tax-reporting accounting (TRA) was $185,313
and $292,875 for the three months ended September 30, 1995 and 1994,
respectively. Net income for the nine months ended September 30, 1995 and
1994 using GAAP was $665,134 and $1,484,633 and using TRA was $581,527 and
$1,491,338, respectively. The difference between GAAP income and TRA income
was due primarily to the treatment of loan discount accretion, loan
commitment fee income, letters of credit income, Supplemental Interest
income and provision for loan losses. GAAP requires that discounts on
mortgage loan receivables be recognized as an adjustment to yield over the
estimated life of the loan; for tax purposes the discount is recognized as
income when received. GAAP requires that loan commitment fee income be
recognized as income over the term of the related loans; for tax purposes
the fees are recognized as income when received. GAAP requires that income
received from letters of credit be recognized on a straight-line basis over
the term of the letter of credit (typically one year); for tax purposes,
this income is recognized as income when received. For GAAP purposes, Gross
Receipts Interest is reported as earned on the accrual basis of accounting;
for tax purposes 50% of the amount of Gross Receipts Interest earned is
credited against Supplemental Interest Income paid in prior years. For GAAP
purposes, a provision for loan losses is recognized when the net realizable
value of the asset is less than the carrying value of the asset; for tax
purposes, a provision for loan losses is allowed when the debt becomes
worthless within the taxable year. TRA income is used in applying the
REIT-qualifying test that requires 95% of taxable income to be paid out in
dividends. (See Note 1 to Notes to Financial Statements).
Cash provided by operations was $33,920 and $1,217,652 and dividends
declared were $541,847 and $1,147,432 for the nine months ended September
30, 1995 and 1994, respectively. Total dividends declared provided
Stockholders with an annualized return of 1.13% and 2.40% for the nine
months ended September 30, 1995 and 1994, respectively.
During 1994, the Fund's Board of Directors approved a change in the
structure of the Fund's Mortgage Loans to NTS/Virginia Development Company
and NTS/Lake Forest II Residential Corporation (the "Affiliated Borrowers")
<PAGE>
Results of Operations - Continued
from fixed rate mortgage loans bearing interest at 7.64% and 6.74%,
respectively, to cash flow mortgage loans. Effective July 1, 1994, these
Affiliated Borrowers began paying interest at an annualized rate equal to
the greater of 17% of Gross Receipts from the sale of the underlying real
estate (residential lots) which secures the mortgage or 4.42% of the average
outstanding loan balance. Interest will be due and payable monthly as lots
are sold. Any shortfall to meet the minimum rate of 4.42% will be due and
payable December 31 of the calendar year. The Fund will no longer receive
Regular Interest, Gross Receipts Interest or other fees previously charged.
In February 1995, the Fund purchased a 50% interest in a $13 million first
mortgage loan to the Orlando Lake Forest Joint Venture. The loan bears
interest at the greater of 17% of Gross Receipts or 6.46% of the average
outstanding loan balance. The decrease in interest income on mortgage loans
receivable for the nine months ended September 30, 1995 over the comparable
period in 1994 is due to a decrease in the average rate earned by the Fund.
The rate decreased from approximately 6.3% (1994) to 4.7% (1995) of the
average outstanding balances of the earning loans. The average rate earned
by the Fund for the three months ended September 30, 1995 and 1994 was
approximately 4.64%. The increase in interest income on mortgage loans
receivable for the three months ended September 30, 1995 over the comparable
period in 1994 is to an increase in the average outstanding balances of the
earning loans.
Effective July 1, 1992, the Fund discontinued accruing interest income from
the $3,000,000 Phase-In Mortgage Loan and the Temporary Mortgage Loan to the
Orlando Lake Forest Joint Venture until the principal and interest have been
received. Approximately $1,827,000 of interest remains due on these loans
but is not accrued in the Fund's financial statements. The Fund has entered
into a forbearance agreement with the Orlando Lake Forest Joint Venture
whereby, effective April 1, 1995, no interest will be due on these loans
through January 31, 1998. The Fund will reevaluate the status of the
Orlando Project at that time to determine what, if any, additional courses
of action to pursue, and whether to extend the forbearance of interest.
Commitment fees paid at loan closings were amortized over the life of the
loan using the interest method. Letter of credit fees are amortized over
the term of the letter of credit. Fee income on mortgage loans and other
financial services is the amount of commitment fees and letter of credit
fees being amortized for the period. The decline in fee income for the
three and nine months ended September 30, 1995 over the comparable period
in 1994 is due primarily to the fact that all commitment fees were fully
amortized as of December 31, 1994.
Gross Receipts Interest represented 5% of the Affiliated Borrowers' Gross
Receipts from the sale of the underlying real estate (residential lots)
during the period. The Fund earned Gross Receipts Interest of $14,075 and
$126,964 for the three and nine months ended September 30, 1994,
respectively. This amount was generated from the Fund's Mortgage Loans to
NTS/Virginia Development Company, NTS/Lake Forest II Residential Corporation
and the Phase-In Mortgage Loan to the Orlando Lake Forest Joint Venture.
No Gross Receipts Interest has been earned in 1995. Effective July 1, 1994,
the only loan which provides for Gross Receipts Interest is the Phase-In
Mortgage Loan to the Orlando Lake Forest Joint Venture.
In addition to Points, Regular Interest and Supplemental Interest, the Fund
may receive Incentive Interest in connection with Mortgage Loans made to
Affiliated Borrowers secured by properties not held for sale in the ordinary
course of the Affiliated Borrower's business; except that in certain cases
the Fund may forego Incentive Interest in order to maintain compliance with
REIT qualification requirements and may instead either seek additional
<PAGE>
Results of Operations - Continued
Points or Regular Interest or will seek to obtain Gross Receipts Interest.
The Fund does not anticipate receiving Incentive Interest and Gross Receipts
Interest on the same Mortgage Loan. The amount of Incentive Interest which
the Fund will receive from Affiliated Borrowers will be equal to a specified
percentage of the "Increase in Value" of the underlying property securing
the Mortgage Loan, which Increase in Value occurred during the period
beginning from the date that the Mortgage Loan was funded and ending upon
the repayment of the Mortgage Loan at maturity or upon the Sale or
Refinancing of the underlying property excluding a sale or transfer to an
Affiliate, so long as the Fund retains an interest in the property
subsequent to the sale or transfer. No Incentive Interest has been included
in revenues for either the three or nine months ended September 30, 1995 or
1994.
The Fund's by-laws provide that annual operating expenses of the Fund may
not exceed in any year the greater of (i) 2% of the Funds average invested
assets during such year or (ii) 25% of the Fund's taxable income during such
year. The Advisor must reimburse the Fund within 60 days after the end of
the year the amount by which the aggregate annual Operating Expenses paid
or incurred by the Fund exceed the foregoing limitations, unless the Board
of Directors approves expenses in excess of such limitations. No
reimbursement was required for either the three or nine months September 30,
1995 or 1994 as operating expenses did not exceed the limit.
Operating expenses of the Fund include a Management Expense Allowance
(Advisory Fee) of 1% of the Fund's Net Assets, per annum, which may be
increased annually by an amount corresponding to the percentage increase in
the Consumer Price Index. The Advisory Fee is paid to the Advisor (NTS
Advisory Corporation) or its affiliate. Effective July 1, 1994, the Fund's
Mortgage Loans to Fawn Lake and Lake Forest were converted to cash flow
mortgage loans. As part of the consideration for this restructuring, the
Fund's Board of Directors required, among other things, that beginning in
1995, NTS Advisory Corporation pay $100,000 annually towards the expenses
of the Fund until the maturity of the Mortgage Loans. As such, the Advisory
Fee has been reduced $25,000 and $75,000 for the three and nine months ended
September 30, 1995. The Advisory Fee for the three months ended September
30, 1995 and 1994 was $132,670 and $153,400, and for the nine months ended
September 30, 1995 and 1994 was $396,472 and $460,100, respectively.
Increases and decreases in the Advisory Fee generally correspond directly
to increases and decreases in the Fund's Net Assets.
Professional and administrative expenses include primarily directors' fees,
legal, outside accounting and investor processing fees, and printing costs
for financial reports. Expenses are comparable between years.
Income tax expense is the Fund's estimated liability for Federal, state, and
local income taxes due on the amount of earnings which are in excess of
dividends for the period.
The Fund has invested in Mortgage Loans totalling approximately $58,300,000
and $45,833,000 as of September 30, 1995 and 1994, respectively. Also, the
Fund has invested in Temporary Investments totalling approximately
$5,000,000 and $7,016,000 as of September 30, 1995 and 1994, respectively.
The balance of funds were invested in short-term cash equivalents. The
Temporary Investments were funded as an alternative to other short-term
investments in order to obtain higher interest rates.
<PAGE>
Results of Operations - Continued
The Fund's investments at September 30, 1995 were as follows:
A Mortgage Loan to NTS/Lake Forest II Residential Corporation, an
Affiliated Borrower, to fund the development of Lake Forest, a
specified investment. The loan balance was $26,119,336 at September
30, 1995.
A Mortgage Loan to NTS/Virginia Development Company, an Affiliated
Borrower, to fund the development of Fawn Lake, a specified
investment. The loan balance was $26,768,232 at September 30, 1995.
A Mortgage Loan to Orlando Lake Forest Joint Venture, an Affiliated
Borrower, to fund the Orlando Lake Forest Loan, a specified
investment. The loan balance was $4,990,158 at September 30, 1995,
net of an unaccreted discount of $1,312,058.
A Temporary Mortgage Loan to Orlando Lake Forest Joint Venture, an
Affiliated Borrower, to partially fund the Orlando Lake Forest Loan,
a specified investment. Effective July 1, 1992, the Fund
discontinued accruing interest income on the Temporary Mortgage Loan
and classified the loan as non-earning. In addition, the Fund has
established a loan loss reserve of $1,500,000 as of September 30,
1995 regarding this loan. The loan balance was $5,190,281 at
September 30, 1995.
A Phase-In Mortgage Loan to Orlando Lake Forest Joint Venture, an
Affiliated Borrower, to develop Orlando Lake Forest Section II, a
specified investment. Effective July 1, 1992, the Fund discontinued
accruing interest income on the Phase-In Mortgage Loan and classified
the loan as non-earning. In addition, the Fund has established a
loan loss reserve of $138,855 as of September 30, 1995 regarding this
loan. The loan balance was $434,811 at September 30, 1995.
The Fund's investment of $26,119,336 in NTS/Lake Forest II Residential
Corporation represents approximately 41% of the Fund's portfolio and the
Fund's commitment of $28,000,000 represents approximately 44% of the Fund's
portfolio. The Fund's investment of $26,768,232 in NTS/Virginia Development
Company represents approximately 42% of the Fund's portfolio and the Fund's
commitment of $28,000,000 represents approximately 44% of the Fund's
portfolio. Both loans are current in their interest payments to the Fund.
In addition, the Fund's Mortgage Loan to the Orlando Lake Forest Joint
Venture is current in its interest payments to the Fund.
The Fund's Phase-In Mortgage Loan and Temporary Mortgage Loan to the Orlando
Lake Forest Joint Venture are not current in their interest payments to the
Fund. Approximately $1,827,000 of interest remains due on these loans but
is not accrued in the Fund's financial statements. The Fund has entered
into a forbearance agreement with the Orlando Lake Forest Joint Venture
whereby, effective April 1, 1995, no interest will be due on these loans
through January 31, 1998. The Fund will reevaluate the status of the
Orlando Project at that time to determine what, if any, additional courses
of action to pursue, and whether to extend the forbearance of interest.
The Fund has established a $1,500,000 loan loss reserve regarding the
Temporary Mortgage Loan to the Orlando Lake Forest Joint Venture and a
$138,855 loan loss reserve regarding the $3,000,000 Phase-In Mortgage Loan
to the Orlando Lake Forest Joint Venture. The amount of the reserve was
determined by comparing the mortgage note receivable balance with the
discounted value of estimated future cash flows as well as considering
current and future economic conditions. This reserve is based on estimates
<PAGE>
Results of Operations - Continued
and ultimate losses may vary. These estimates are reviewed periodically
and, as adjustments become necessary, they are reported in earnings in the
period in which they become known. In addition, the Fund has reduced the
carrying amount due on the Phase-In Mortgage Loan by $241,145 as an amount
deemed uncollectible. The loan is non-recourse, thus, once the remaining
lots in Section II of the Orlando Project have been sold, the Fund has no
further course of action to pursue collection.
During the nine months ended September 30, 1995, the Fund received repayment
on four mortgage loans and two temporary investments in the aggregate
principal amount of $5,972,911. Effective July 1, 1994, repayments on
mortgage loans are generally equal to approximately 83% of the Gross
Receipts received on lot sales less closing costs. The Fund made
investments in three mortgage loans in the aggregate principal amount of
$17,164,627.
During the nine months ended September 30, 1994, the Fund received repayment
on three mortgage loans and one temporary investment in the aggregate
principal amount of $3,143,263. The repayments of mortgage loans through
June 30, 1994 were based on Scheduled Principal Payments of (i) 80% of the
Gross Receipts received on sales of lots to builders and (ii) 70% of the
Gross Receipts received on sales of lots to individuals. Effective July 1,
1994, repayments for all lots are generally equal to approximately 83% of
the Gross Receipts received on lot sales less closing costs. The Fund made
investments in two mortgage loans in the aggregate principal amount of
$3,278,406.
During the nine months ended September 30, 1995, the Fund borrowed
$14,068,000 on its credit facilities. The Fund repaid $2,528,528 of its
borrowings using proceeds from the new $13.8 million credit facility. The
remaining $374,000 reduction in debt came primarily from loan repayments
made by NTS/Lake Forest II Residential Corporation. The Fund also borrowed
$750,000 from an Affiliate of the Fund's Sponsor.
During the nine months ended September 30, 1994, the Fund borrowed $554,691
on its credit facility. The Fund repaid $802,897 of these borrowings using
proceeds from loan repayments made by NTS/Lake Forest II Residential
Corporation.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In August 1992, Jeno Paulucci & Silver Lakes I, Inc., individually
and d/b/a PR Partners (PR Partners) filed a complaint ("Original
Complaint") against J. D. Nichols, NTS Corporation, NTS/Florida
Residential Properties, Inc., Orlando Lake Forest, Inc. and Banc
One Mortgage Corporation. The Original Complaint alleges, inter
alia, mismanagement of the Orlando Lake Forest project by Orlando
Lake Forest, Inc. as well as conspiracy among the defendants
against PR Partners and its principals. The Original Complaint
requested unspecified damages and declaratory and injunctive relief
against the defendants. The Fund was not named as a defendant in
the Original Complaint. In July 1994, the plaintiffs filed an
amended complaint ("Amended Complaint") adding NTS/Residential
Properties, Inc. - Florida, Lake Forest Realty, Inc. and the Fund
as defendants, and amended this Complaint again in July 1995, in
response to rulings by the trial judge requiring clarification of
certain claims asserted by the plaintiffs. The case is in the
early discovery phase, certain of the defendants have answered the
Complaint and asserted counterclaims against the plaintiffs. Lake
Forest Realty, Inc., the Fund and Banc One Mortgage Corporation
have again moved to dismiss the Complaint, as amended. Therefore,
an outcome to this litigation cannot be predicted at present.
Mr. J. D. Nichols and the principals of the defendants have
indicated that the suit will be vigorously defended, and that
counterclaims will be vigorously prosecuted against the plaintiffs.
Management believes that this lawsuit will have no material effect
on the Fund's operations or financial condition.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description
28 Additional Exhibits - Pages from the Fund's
Prospectus which have been specifically
incorporated by reference and copies of
which are attached hereto which includes
pages 75 to 81.
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, NTS Mortgage Income Fund has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
NTS Mortgage Income Fund
(Registrant)
/s/ John W. Hampton
John W. Hampton
Secretary/Treasurer (principal
accounting and chief financial
officer)
Date: November 13, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF SEPTEMBER 30, 1995 AND FROM THE INCOME STATEMENT FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 592145
<SECURITIES> 0
<RECEIVABLES> 64433453
<ALLOWANCES> 1638855
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 63564962
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 14226000
<COMMON> 3187
0
0
<OTHER-SE> 49161685
<TOTAL-LIABILITY-AND-EQUITY> 63564962
<SALES> 0
<TOTAL-REVENUES> 2133487
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 396472
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 893772
<INCOME-PRETAX> 672634
<INCOME-TAX> 7500
<INCOME-CONTINUING> 665134
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 665134
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
<FN>
<F1>The company has an unclassified balance sheet; therefore, the value is $0.
</FN>
</TABLE>
EXHIBIT NO. 28 - ADDITIONAL EXHIBITS
Included is this Exhibit Number 28 is the Glossary of Terms from pages 75
to 81 of NTS Mortgage Investment Fund's Prospectus dated March 31, 1989.
The text of these pages has been duplicated in type style and font
compatible with the other portions of the Fund's Form 10-K Annual Report and
suitable for electronic filing with the Securities and Exchange Commission.
As a result, although Exhibit 28 contains all of the words contained in the
Glossary section of the Prospectus, the total text of each page of this
Exhibit does not exactly correspond to the total text of the page of the
Prospectus from which it is taken.
GLOSSARY
"Accountable Due Diligence Expense Allowance" shall mean an amount equal to
1/2% of the Gross Proceeds payable to the Selling Agent as reimbursement for
its accountable expenses incurred in connection with bona fide due diligence
activities.
"Acquisition Expenses" shall mean expenses related to the Fund's selection
of and investment in, Mortgage Loans and Real Estate Investments (whether
or not made), including but not limited to legal fees and expenses, travel
and communication expenses, costs of appraisals, accounting fees and
expenses, title insurance and miscellaneous other expenses.
"Acquisition Fees" shall mean the total of all fees and commissions, however
designated, paid by any party in connection with the making or investing in
Mortgage Loans or Real Estate Investments.
"Adjusted Contribution" shall mean the Original Capital Contribution paid
by the original purchaser of a Share, reduced by the total cash distributed
with respect to such Share from Capital Proceeds.
"Advisor" shall mean NTS Advisory Corporation, a Delaware Corporation which
will serve as the initial investment advisor and administrator of the Fund,
or any successor Advisor selected by the Directors, or any person or entity
to which the Advisor subcontracts substantially all of its administrative
functions.
"Advisory Agreement" shall mean the agreement between the Fund and the
Advisor, pursuant to which the Advisor will act as the investment advisor
and administrator of the Fund.
Affiliate" shall mean (i) any person directly or indirectly controlling,
controlled by or under common control with another person, (ii) any person
owning or controlling 10% or more of the outstanding voting securities or
beneficial interests of such other person, (iii) any officer, director,
trustee or general partner of such person or (iv) if such other person is
an officer, director, trustee or partner of another entity, then the entity
for which that person acts in any such capacity.
"Affiliated Borrower" shall mean Affiliates of NTS which obtain a Mortgage
Loan from the Fund.
"Affiliated Directors" shall mean those Directors who are not Independent
Directors.
"Appraised Value" of a Real Estate Investment or the Real Estate securing
a Mortgage Loan shall mean the value of the subject Real Estate at a
specified point in time as determined by an MAI Appraisal acceptable to the
Directors.
<PAGE>
"As-Built Appraised Value of the Property" shall mean (i) for Development
Loans, Residential Land Development Loans and Commercial Land Development
Loans, the land portion of the appraised value of the mortgaged property,
and (ii) for Construction Loans, the appraised value of the mortgaged
property (as determined by MAI Appraisal), in each case including
improvements to be made by the Borrower, taking into account the Borrower's
planned construction and development of the property.
"Average Invested Assets" shall mean for any period, the average Total
Assets of the Fund invested, directly or indirectly, in Mortgage Loans and
Real Estate Investments, before reserves for bad debts or other similar non-
cash reserves, computed by taking the average of such values at the end of
each month during such period.
"Below Market Interest Obligation" shall mean any note, agreement, contract
or other obligation pursuant to which a purchaser agrees to make periodic
payments in respect of the Real Estate purchased, which provides for the
payment of interest in respect of the amount due at a rate which is lower
than an interest rate 400 basis points below the then applicable Prime Rate.
"Board of Directors" shall mean all of the Directors having been duly
elected or otherwise properly in office pursuant to the Organizational
Documents.
"Borrower" shall mean any person, including an Affiliated Borrower, which
obtains a Mortgage Loan from the Fund.
"Bylaws" shall mean the Bylaws of the Fund, as they may be amended from time
to time.
"Capital Proceeds" shall mean the net cash realized from the repayment,
retirement, refinancing, sale or other disposition of the Fund's Real Estate
Investments and Mortgage Loan investments, including payments of Principal,
Interest Reserve, Gross Receipts Interest and Incentive Interest, but
excluding Points and Regular Interest, after reduction for the following:
(i) payment of all expenses related to the transaction; (ii) payment of all
debts and obligations of the Fund arising from or otherwise related to the
transaction, including fees to the Advisor or its Affiliates; and (iii) any
amount set aside by the Advisor for working capital reserves; provided,
however, that proceeds from a disposition of a Fund investment shall not be
deemed to be "Capital Proceeds" to the extent such proceeds are reinvested
by the Fund and not distributed to Stockholders.
"Cash Flow Guaranty" shall mean the obligation of the Guarantor to provide
investors, directly or indirectly, a minimum return (from all sources) equal
to an annual 12% cumulative, non-compounded, return on their Original
Capital Contributions during the Cash Flow Guaranty Period.
"Cash Flow Guaranty Period" shall mean the period beginning with the 90th
day following the Initial Closing and ending upon the later of two years
thereafter or one year following the Offering Termination Date.
"Certificate of Incorporation" shall mean the certificate of incorporation
filed by the Fund in Delaware, as it may be amended from time to time.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
corresponding provisions of any successor legislation.
<PAGE>
"Commercial Land Development Loan" shall mean a Mortgage Loan, secured by
unimproved or partially improved real property subject to a development
plan, obtained by a Borrower for the purpose of acquiring, carrying and
improving the parcel through pre-development and in certain instances
development activities, including, without limitation, the construction of
infrastructure and other improvements necessary to prepare the parcel for
the construction of commercial or industrial developments, including zoning,
planning and construction of amenity packages, and landscaping, for resale
(or in limited cases, lease) in the ordinary course of business of the
Borrower or an Affiliate.
"Construction Loan" shall mean a Mortgage Loan obtained by a Borrower for
the purpose of constructing improvements on real property.
"Dealer Property" shall mean property held primarily for sale to customers
in the ordinary course of one's trade or business.
"Dealers" shall mean the Participating Dealers and the Selling Agent.
"Deficiency Dividend" shall mean a distribution of the Fund within the
meaning of Section 859(d) of the Code.
"Delaware Corporation Statute" shall mean the General Corporation Law of the
State of Delaware, as it may be amended from time to time.
"Development Loan" shall mean a Mortgage Loan obtained by a Borrower for the
purpose of acquiring, carrying and engaging in pre-development and
development activities with respect to real property prior to the
construction of improvements thereon, which activities shall include,
without limitation, engineering, zoning, planning and construction of common
area and amenities including the construction of clubhouses, pools, etc.,
but shall exclude Residential and Commercial Land Development Loans.
"Directors" shall mean, as of any particular time, Directors holding office
under the Certificate of Incorporation and Bylaws at such time, whether they
are the Directors named therein or additional or successor Directors
appointed by the initial Board of Directors or duly elected by the
Stockholders.
"Dividend Reinvestment Plan" or "Plan" shall mean the plan pursuant to which
Stockholders may direct that cash distributions otherwise payable to them
from the Fund with respect to Shares owned by them be delivered instead to
the Reinvestment Agent, who is directed, pursuant to the terms of the plan,
to acquire additional Shares with such cash.
"Escrow Agent" shall mean Liberty National Bank & Trust Company of
Louisville, Kentucky, or any other entity selected by the Directors to serve
as escrow agent for the Fund.
"Escrow Guaranty" shall mean the Guarantor's obligation to advance to the
Fund, directly or indirectly, the amount necessary to supplement the
interest generated by subscription proceeds so as to provide subscribers
with an 8% annual, non-compounded return on their subscriptions, calculated
from the date the subscriber's proceeds were deposited in the escrow account
through the 89th day following the Initial Closing Date (or if the Minimum
Number of Shares is not sold, through the date on which the proceeds are
released from the escrow account).
<PAGE>
"Federal Funds Rate" shall mean the average of the prior month's rate at
which reserves are traded among commercial banks for overnight use in
amounts of one million dollars or more, as published in the Federal Reserve
Statistical Release H.15(519), or, in the event that such a release does not
exist, "Federal Funds Rate" shall mean that announced in the Wall Street
Journal, or its successor, as it shall change from time to time.
"First Mortgage Loans" shall refer to Mortgage Loans which have as security
a first mortgage or first priority lien on the collateral property.
"Foreclosure Property" shall mean real property (including interests in real
property), and any personal property incident thereto, which is acquired by
the Fund as the result of a bid in foreclosure, or by agreement or legal
process, following a default (or where a default was imminent) on a lease
of the property or on an indebtedness secured by such property.
"Foreign Investor" shall mean a nonresident alien, a foreign corporation or
an entity consisting of such persons.
"Fund" shall mean NTS Mortgage Income Fund, a Delaware corporation, or any
successor thereto.
"Funds Available for Investment" shall mean the Gross Proceeds to be Raised
in this Offering ($100,000,000) plus an amount equal to the aggregate
borrowings which the Fund is authorized to make (300% of Net Assets).
"Gross Proceeds" shall mean the aggregate Original Capital Contributions of
all Stockholders.
"Gross Proceeds to be Raised" shall mean $100,000,000.
"Gross Receipts" shall mean, with regard to (i) any Real Estate serving as
collateral for a Mortgage Loan the record title to which has been conveyed
to the purchaser, the total fair market value of the consideration,
inclusive of the face amount of the notes or other payment obligations
received by an Affiliated Borrower from the sale of such Real Estate,
without reduction for any costs or expenses incurred in connection with the
sale, development or improvement of the Real Estate, real estate commissions
or other closing expenses, but net of amounts to be repaid or credits
allowed to the purchaser such as builder discounts or rebates, landscaping
allowances or similar expenses as well as any sale or transfer tax imposed
on the transaction, provided, however, that Gross Receipts shall not include
the face amount of any Below Market Interest Obligation, and (ii) any Real
Estate serving as collateral for a Mortgage Loan which the Borrower has
agreed to sell to a purchaser but as to which the record title has not been
conveyed to the purchaser or which has been conveyed to the purchaser in
exchange for a Below Market Interest Obligation, the amount of cash received
by the Affiliated Borrower as and when received.
"Gross Receipts Interest" shall mean, with respect to a Mortgage Loan
secured by Real Estate held for sale in the ordinary course of business, an
amount equal to a specified percentage of the Affiliated Borrower's Gross
Receipts from the sale of the underlying Real Estate received during the
term of the Mortgage loan.
"Guarantor" shall mean NTS Guaranty Corporation, a Delaware corporation or
any successor thereto.
"Incentive Interest" shall mean the Fund's share in the Increase in Value
of a property securing a Mortgage Loan and shall be payable in connection
with Mortgage Loans secured by Real Estate not held for sale in the ordinary
course of business.
<PAGE>
"Incentive Interest Agent" shall mean the independent party authorized to
receive Incentive Interest payments from Borrowers and pay to the Fund the
amount of such payments to which it is entitled, with the remainder of such
payments to be returned to the Borrowers.
"Increase in Value" shall mean the difference between the Appraised Value
of a property at the time of funding a Mortgage Loan and the Appraised Value
of such property (or the fair market value of the consideration received in
the case of a sale) upon the earlier of the maturity of the Mortgage Loan
or the sale or refinancing of the collateral property, net of the actual
cost incurred in connection with the improvement of the collateral property
since the date of the funding of the Mortgage Loan. For purposes of this
definition, the phrase "actual cost incurred" shall refer to all costs paid
by the Borrower to Affiliated and Non-Affiliated parties in connection with
the acquisition, holding, ownership, or development or improvement of the
property, including without limitation, costs of acquiring and financing the
property.
"Increased Maximum Number of Shares" shall mean 5,000,000 Shares in this
public offering.
"Independent Advisor" shall mean Laventhol and Horwath or any alternative
person selected by the Independent Directors to provide an opinion
concerning the fairness of the terms of proposed Mortgage Loans to
Affiliated Borrowers and acquisitions of Real Estate Investments from
Affiliates.
"Independent Directors" shall mean the Directors who: (i) are not
Affiliated, directly or indirectly, with the Advisor, whether by ownership
of, ownership interest in, employment by, any business or professional
relationship with, or service as an officer or director of, the Advisor or
its Affiliates; (ii) do not serve as a director or trustee for more than two
other REITs organized by the Advisor or its Affiliates; and (iii) perform
no other services for the Fund, except as Directors. An indirect
relationship shall include circumstances in which the immediate family of
a Director has one of the foregoing relationships with the Advisor or the
Fund.
"Initial Closing Date" shall mean the date on which the first closing for
Shares sold pursuant to the Prospectus occurs.
"Initial Fund Investments" shall mean those investments which the Fund has
specified as of the date of this Prospectus being the Fawn Lake Loan,
Orlando Lake Forest Loan, the Louisville Lake Forest North Loan and the
Blankenbaker Crossings Loan.
"Interest Reserve" shall mean the amount loaned or committed to be loaned
to a Borrower to Fund the Borrower's projected future payments of Regular
Interest to the Fund and upon which Regular Interest shall be charged once
disbursed.
"Investable Proceeds" shall mean the Gross Proceeds less Organization and
Offering Expenses, plus an amount equal to the outstanding borrowings of the
Fund, exclusive of borrowings made in connection with Real Estate
Investments.
"IRA" shall mean an Individual Retirement Account established pursuant to
Section 408 of the Code or any successor provision.
"Junior Mortgage Loan" shall refer to any Mortgage Loan which is subordinate
to another mortgage or deed of trust secured by the collateral real property
and shall exclude Temporary Mortgage Loans and loans which are outstanding
and being "phased-in" pending full funding of a First Mortgage Loan.
<PAGE>
"Junior Mortgage Loan Guaranty" shall mean the Guarantor's obligation to pay
the Fund the Principal amount of any Junior or Temporary Mortgage Loan on
which the Affiliated Borrower has defaulted.
"Land Acquisition Loans" shall mean a Mortgage Loan obtained by a Borrower
for the purpose of acquiring Unimproved Real Property.
"Loan" shall mean a Mortgage Loan or Temporary Mortgage Loan made by the
Fund.
"MAI Appraisal" shall mean an appraisal made by a member in good standing
of the American Institute of Real Estate Appraisers.
"Majority Vote" shall mean the vote or consent in person or by proxy of
Stockholders owning more than 50% of the outstanding Shares.
"Management Expense Allowance" shall mean a non-accountable expense
allowance relating to services performed for the Fund (but excluding amounts
paid by the Advisor on behalf of the Fund to third parties) in an amount
equal to 1% of the Fund's Net Assets, per annum, payable quarterly to the
Advisor which may be increased annually by an amount corresponding to the
percentage increase in the Consumer Price Index for all urban consumers-
Louisville or a comparable consumer price index, which increase will in no
event cause the Fund's Operating Expenses to exceed the limitation imposed
by the Bylaws.
"Maximum Number of Shares" shall mean 2,500,000 Shares in this public
offering.
"Minimum Number of Shares" shall mean 75,000 Shares to at least 100
independent investors in this public offering.
"Mortgage Loans" shall mean Residential Land Development Loans, Commercial
Land Development Loans, Permanent Mortgage Loans, Construction Loans,
Development Loans and Land Acquisition Loans evidenced by notes, debentures,
bonds and other evidences of indebtedness or obligations (other than
Temporary Mortgage Loans made by the Fund) which are secured or
collateralized by: (i) interests in real property; (ii) other beneficial
interests essentially equivalent to a mortgage on real property; or (iii)
interests in partnerships, joint ventures, or other entities which own real
property.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"NASDAQ" shall mean the nationwide automated quotations system operated by
the NASD.
"Net Assets" shall mean the Total Assets (other than intangibles) at cost
before deducting depreciation or other non-cash reserves, less total
liabilities, calculated quarterly according to generally accepted accounting
principles on a basis consistently applied.
"Net Income" for any period shall mean total revenues applicable to such
period as determined for federal income tax purposes, less the expenses
applicable to such period, other than additions to reserves for bad debts
or other similar non-cash reserves. In connection with the calculation of
any incentive type fee, Net Income, for purposes of calculating Operating
Expenses, shall not include the gain from the sale of the Fund's assets.
<PAGE>
"Non-Accountable Expense Allowance" shall mean an amount equal to 1% of the
Gross Proceeds payable to the Selling Agent as reimbursement for its non-
accountable sales and other expenses incurred in connection with the offer
and sale of Shares.
"Non-Affiliate" shall mean persons who are not Affiliates.
"NTS" shall mean NTS Corporation, a Delaware corporation which is the
Sponsor for the Fund.
"Offering Termination Date" shall mean the date on which the last closing
for Shares sold pursuant to the Prospectus occurs which shall occur either
one year from the date of this Prospectus subject to increase for up to an
additional year in the discretion of the Board of Directors and subject to
compliance with applicable state and federal laws.
"Operating Expenses" shall mean all operating, general and administrative
expenses of the Fund as determined under generally accepted accounting
principles, including but not limited to rent, utilities, capital equipment,
salaries, fringe benefits, travel expenses, the Management Expense
Allowance, expenses paid by third parties to the Advisor and its Affiliates
based upon its relationship with the Fund (e.g. loan administration,
servicing, engineering and inspection expenses) and other administrative
items, but excluding the expenses of raising capital, interest payments,
taxes, non-cash expenditures (e.g. depreciation, amortization, bad debt
reserve), the Subordinated Advisory Fee and the costs related directly to
a specific Mortgage Loan or Real Estate Investment by the Fund, such as
expenses for originating, acquiring, servicing or disposing of said specific
Real Estate Investment or a Mortgage Loan.
"Organization and Offering Expenses" shall mean those expenses payable by
the Fund in connection with the formation, qualification and registration
of the Fund and in marketing, distributing and processing Shares, including
any Sales Commissions, Non-Accountable Expense Allowance, Accountable Due
Diligence Expense Allowance, and any other expenses actually incurred and
directly related to the registration, offering and sale of Shares, including
such expenses as: (a) fees and expenses paid to attorneys in connection with
the offering; (b) registration fees, filing fees and taxes; (c) the costs
of qualifying, printing, amending, supplementing, mailing and distributing
the Fund's Registration Statement and Prospectus, including telephone and
telegraphic costs; (d) the costs of qualifying, printing, amending,
supplementing, mailing and distributing sales materials used in connection
with the issuance of Shares, including telephone and telegraphic costs; (e)
remuneration of officers and employees of the Advisor and its Affiliates
while directly engaged in marketing, distributing, processing and
establishing records of Shares and establishing records and paying Sales
Commissions; and (f) accounting and legal fees and expenses incurred in
connection therewith to the Advisor or its Affiliates.
"Organizational Documents" shall mean the Fund's Certificate of
Incorporation and By-Laws, as they may be amended from time to time.
"Original Capital Contribution" shall mean the amount of $20.00 for each
Share, which amount shall be attributed to such Share in the hands of
subsequent holders thereof.
"Participating Dealers" shall mean members in good standing of the National
Association of Securities Dealers, Inc., ("NASD") engaged by the Selling
Agent to offer and sell Shares on a "best efforts" basis, as well as certain
selected foreign broker dealers, who are not eligible for membership in the
NASD, who agree to abide by the provisions of Section 25 of the NASD Rules
of Fair Practice.
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"Permanent Mortgage Loans" shall mean notes, bonds and other evidences of
indebtedness or obligations (other than temporary investments made by the
Fund) which are secured or collateralized by interests in (i) income
producing real property, (ii) other beneficial interest essentially
equivalent to a mortgage on income producing real property or (iii)
partnerships, joint ventures or other entities which own income producing
real property. Such Mortgage Loans may be Junior or First Mortgage Loans
and will generally have terms of between three and five years, subject to
extension for up to two two-year periods.
"Points" shall mean the fee payable to the Fund at the time funds are
advanced under a Mortgage Loan.
"Prime Rate" shall mean the rate of interest as published in the Federal
Reserve Statistical Release H.15(519), as it shall change from time to time.
In the event that such a release does not exist, "Prime Rate" shall mean the
prime lending rate as published in the Wall Street Journal, or its
successor.
"Principal" shall mean the funds loaned to a Borrower, excluding the amount
of the Interest Reserve.
"Prohibited Transaction" shall mean the sale of Dealer Property other than
both Foreclosure Property and certain Dealer Property held by the Fund for
at least four years.
"Prospectus" shall mean the final prospectus of the Fund with respect to the
offer and sale of Shares filed with the Securities and Exchange Commission
as part of the Fund's Registration Statement on Form S-11, as amended.
"Qualified Plans" shall mean qualified pension, profit-sharing and other
employee retirement benefit plans (including Keogh [HR 10] plans) and
trusts, bank commingled trust funds for such plans and individual retirement
accounts.
"Real Estate" shall mean all real properties or any interest therein
acquired directly or indirectly by the Fund, including real properties
acting as collateral for Mortgage Loans.
"Real Estate Investments" shall mean direct or indirect equity investments
by the Fund in all forms in Real Estate, and shall exclude investments in
Mortgage Loans as well as any investments in Mortgage Loans characterized
as equity investments for financial accounting purposes.
"Regular Interest" shall mean the rate of interest payable periodically on
a Mortgage Loan, as determined by the Board of Directors at the beginning
of each Mortgage Loan or any extension thereof.
"Regular Interest Rate" shall mean the rate of interest payable periodically
on a Mortgage Loan and shall be equal to (i) 500 basis points and 300 basis
points in excess of the rate on a treasury obligation having a maturity
substantially similar to that of the Mortgage Loan for fixed rate Junior and
First Mortgage Loans, respectively, and 400 basis points and 200 basis
points in excess of the Prime Rate, or 570 basis points and 370 basis points
in excess of the Federal Funds Rate, for variable rate Junior and First
Mortgage Loans, respectively.
"Reinvestment Agent" shall mean NTS Depositary Corporation, Louisville,
Kentucky, or its successor as agent for the dividend reinvestment plan.
"REIT" and "real estate investment trust" shall mean a real estate
investment trust as defined in Sections 856 to 860 of the Code.
<PAGE>
"REIT Qualifying Investment" shall mean an investment in assets described
in Section 856(c)(5) of the Code, or any successor provision.
"REIT Taxable Income" shall mean the taxable income as computed for a
corporation which is not a REIT: (i) without the deductions allowed by Code
Sections 241 through 247, 249 and 250 (relating generally to the deduction
for dividends received); (ii) excluding amounts equal to (a) the net income
from foreclosure property and (b) the net income derived from prohibited
transactions; and (iii) deducting amounts equal to (a) any net loss derived
from prohibited transactions, (b) the tax imposed by Code Section 857(b)(5)
upon a failure to meet the 95% and/or 75% gross income tests and (c) the
dividends paid, computed without regard to the amount of the net income from
foreclosure property which is excluded from REIT Taxable Income.
"Residential Land Development Loan" shall mean a Mortgage Loan obtained by
a Borrower for the purpose of acquiring, carrying, improving, through pre-
development, development and sale, the underlying real estate, including,
without limitation, engineering, zoning, planning and construction of common
areas and amenity packages, necessary to prepare the parcel and its
individual sites for the construction of homes (and in limited circumstances
minor portions for commercial purposes) and the sale of such sites in the
ordinary course of business of the Borrower or an Affiliate.
"Sales Commissions" shall mean an amount equal to 8% of the Gross Proceeds
from the sale of each Share, subject to certain discounts, payable to the
Dealers who sell such Shares.
"Selling Agent" shall mean NTS Securities, Inc.
"Shares" shall mean the Fund's shares of common stock with a par value of
$0.001.
"Sponsor" shall mean NTS Corporation, a Kentucky corporation, or any person
directly or indirectly instrumental in organizing, wholly or in part, the
Fund or any person who will manage or participate in the management of the
Fund, and any Affiliate of any such person, but excluding (i) a person whose
only relationship with the Fund is that of an independent property manager
and whose only compensation is as such, and (iii) wholly independent third
parties such as attorneys, accountants and underwriters whose only
compensation is for professional services.
"Stockholders" shall mean as of any particular time the registered holders
of outstanding Shares at such time.
"Subordinated Advisory Fee" shall mean the fee payable to the Advisor or its
Affiliates for services in connection with the liquidation of the Fund's
investments, equal to 5% of the Capital Proceeds remaining after
distributions to Stockholders from all sources in an amount equal to 100%
of their Original Capital Contribution plus a 15% per annum cumulative, non-
compounded return on their Adjusted Contributions to the extent not already
paid, beginning on the Offering Termination Date.
"Supplemental Interest" shall mean the amount, if any, in excess of Regular
Interest, Points, Incentive and Gross Receipts Interest, other cash balances
available for distribution in the discretion of the Board of Directors, and
all other cash receipts of the Fund net of all cash expenditures of the
Fund, that Affiliated Borrowers shall pay the Fund to enable it to make
quarterly distributions to Stockholders equal to an annual 12% cumulative,
non-compounded return on their Original Capital Contributions during the
Cash Flow Guaranty Period.
<PAGE>
"Temporary Investments" shall refer to those investments made by the Fund
pending the receipt of sufficient Investable Proceeds to fund the Initial
Fund Investments, or reinvestment in later Fund loans.
"Temporary Mortgage Loan" shall refer to any temporary mortgage loan
investment made by the Fund to an Affiliated Borrower pending investment or
reinvestment in a Mortgage Loan if such Temporary Mortgage Loan (i) matures
within one year of making the loan subject to any extension in the
discretion of the Board of Directors (ii) is anticipated to generate yields
higher than other temporary investments, (iii) is approved by a majority of
the Independent Directors, and (iv) constitutes a REIT qualifying
investment.
"Tax-Exempt Entities" shall mean Qualified Plans and other entities exempt
from federal income taxation, such as endowment funds and foundations and
charitable, religious, scientific or educational organizations.
"Total Assets" shall mean the book value of all assets of the Fund,
determined in accordance with generally accepted accounting principles.
"Transfer Agent" shall mean an independent national agent selected by the
Directors or any entity designated at some later date.
"Treasury Rate" shall mean the rate of interest paid on United States
Treasury investments, as published in the Federal Reserve statistical
Release H.15(519), as it shall change from time to time, having a maturity
substantially similar to that of the Mortgage Loan; in the event that such
a release is not published, any other nationally-recognized publication.
If there is more than one such treasury investment, then the rate of that
investment priced closest to par shall be used; provided, however, that this
definition may be modified with the approval of a majority of the Directors,
including a majority of the Independent Directors.
"Unimproved Real Estate" shall mean property which has each of the following
three characteristics: (i) it was not acquired for the purpose of producing
rental or other operating income; (ii) there is no development or
construction in process on such land, and (iii) there is no development or
construction planned in good faith to commence on such land within one year.
